17 August 2012 last updated

Impaired annuities lead rates to all time low levels

Impaired annuities reduced followed by all annuity rate providers with decreases of up to 2.0% across the board. Despite the significant increase in gilt yields so far in August from 2.04% to 2.23% today annuity rates have reduced significantly with impaired annuity providers such as Just Retirement and Liverpool Victoria setting the trend with decreases of 1.4%. This has been followed by other leading providers of standard annuity rates Legal & General and Canada Life reducing their rates by up to 2.0% during the day and follows lower rates from Hodge Life earlier in the week. The aggressive reductions is contrary to improvements in the 15-year gilt yields that have improved by 19 basis points in August and as a general rule this would mean a 1.9% increase in annuity rates at some point in the future. However, pension annuities have been behind falls in yields so any increase will not be as great.

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Annuity rates decrease for pensioners

The impaired annuity providers Liverpool Victoria reduced their rates by 1.4% with Just Retirement lower by 0.7%. Partnership assurance and Aviva maintained their impaired health rates. Smoker annuities also reduced creating new market leaders. Again Liverpool Victoria reduced smoker rates by from 0.6% to 1.5% as well as Just Retirement.

Reliance Mutual are now more prominent in the market with the highest rates for males aged 55 where they actually increased rates by 0.4%. They also offer the highest rates for females aged 55 to 65 and joint life annuities aged 65. Partnership have the highest annuities for males aged 75 for the first time although it is unlikely these providers will maintain this position in the long term and they could reduce their rates following the other providers.

Standard pension annuity rates have decreased the greatest amount with Legal & General reducing their rates for males, females and joint life annuitants aged 55 by 2.0%. All other Legal & General annuities have reduced by 1.0% with Canada Life reducing rates by 0.8% to 0.9% although both providers remain the market leaders.

Impact on pensioner annuity income

These decreases are significant for a male aged 55 with a fund of £100,000 the annuity income has reduced from £4,821 pa to £4,727 pa a fall of £94 pa. According to the Office of National Statistics (ONS) the life expectancy of a 55 year old male is 26.0 years and this would result in £2,444 less income over the pensioners lifetime.

Gilt yields have increased this month by 19 basis points and coupled with the decreases in annuity rates means that standard annuities in the short term could increase by 2.0%, smoker annuity rates increase by 1.7% and impaired annuities increase by 2.4%. Bearing in mind all these providers have only just decreased their rates, it is likely that not increases will occur unless gilt yields remain at their current level or increase. Providers are in a strong financial position offering annuity rates at below the level the market could offer with general sentiment for lower annuities.

An impaired annuity should be purchased by pensioners that suffer from medical conditions such as diabetes, heart conditions or cancer that could pay 40% higher incomes. For more subtle conditions such as high blood pressure, Cholesterol, smoking ten or more cigarettes per day or by being overweight an enhanced annuity can offer an 18% higher income.

If pensioners are in good health, a with profits annuity or investment backed annuity could offer 30% higher initial incomes than the conventional open market option. This would be suitable if pensioners have other sources of income such as two or more personal pension funds or a final salary pension as these annuities are slightly riskier than the conventional annuity. The income however has a guaranteed minimum income level and is smoothed over time which makes it less volatile than equities.